IRS Begins to Audit Employment Taxes in 2010

Late last year, the IRS sent notices to approximately 2,000 taxpayers as part of its Employment Tax National Research Project. In February 2010, the IRS will begin examining employers specifically targeting employment taxes: FICA, Social Security, Medicare, and federal income tax withholding. In addition, the IRS plans to audit approximately 2,000 additional taxpayers in each of 2011 and 2012. The IRS will use the results of these approximately 6,000 audits to gauge noncompliance and to determine specific noncompliant employment-tax issues.

This undertaking indicates the IRS may be more attentive to employment tax issues. As a result, taxpayers should consider examining their employment tax compliance and policies.

Generally, employment taxes on salaries are straightforward and in many cases, an outside payroll firm does this calculation. However, the application of employment taxes in less obvious situations may be problematic, and even the most diligent payroll and benefits departments might overlook these issues.

Employment tax-related issues may include:

• Worker classification issues (employee versus independent contractor)
• Fringe benefit issues, including:
  
  
  • Company-provided cars/mileage
  • Company-provided travel for spouse and family
  • Company-provided club memberships
  • Per diem reimbursements/adequate documentation policy for reimbursements
  • Reimbursement of legal fees and other indemnification payments
  • Company-provided computers
  • Company-provided cell phones
  • Personal usage of private aircraft
  • Company-provided gift cards and other taxable benefits
• Nonqualified deferred compensation, constructive receipt issues, options, restricted stock, stock appreciation rights, and phantom stock
• Reasonable compensation issues
• Section 162(m) $1-million-deduction-limit issues
• Section 280G “Golden Parachute” issues
• Employment tax issues for non- U.S. citizens and non-residents of the United States
• FICA tax issues and refund claims
• Correction of payroll tax and reporting errors
• Railroad Retirement Tax
• Household employees 

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Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Carl D. Fortner Milwaukee, Wisconsin 414.297.5739 cfortner@foley.com   Robert E. Goldstein San Diego, California 858.847.6710 rgoldstein@foley.com   Samuel F. Hoffman San Diego, California 619.685.6414 shoffman@foley.com   Marsha E. Huff Milwaukee, Wisconsin 414.297.5743 mhuff@foley.com   Zhu Julie Lee Milwaukee, Wisconsin 414.297.5504 zlee@foley.com   Belinda S. Morgan Chicago, Illinois 312.832.4562 bmorgan@foley.com

Isaac J. Morris Milwaukee, Wisconsin 414.297.4973 imorris@foley.com   Dick Riley Washington, D.C. 202.295.4712 rriley@foley.com   Mark T. Schieble San Francisco, California 415.984.9804 mschieble@foley.com   James R. Spoor Tampa, Florida 813.225.5442 jspoor@foley.com   Timothy L. Voigtman Milwaukee, Wisconsin 414.297.5677 tvoigtman@foley.com   Lynette M. Zigman Milwaukee, Wisconsin 414.297.5733 lzigman@foley.com

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.